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Background: Hospitals have confronted a difficult financial environment given many factors, including expansion of managed care, changes in public policy, growing market competition for certain services, and growth in the number of uninsured. Policy makers have expressed concern that hospitals may forgo providing care to the indigent as a means to reduce costs and become more efficient when faced with financial pressures.

Purpose: This article examined the effects of environmental pressures on two dimensions of hospital performance: hospital efficiency and uncompensated care provision.

Methodology/Approach: Longitudinal data for the Commonwealth of Virginia from 1998 to 2004 were analyzed. Data Envelopment Analysis and bivariate probit were used to examine the factors associated with efficiency and uncompensated care.

Findings: The results indicated that a positive relationship between hospital efficiency and uncompensated care provision exists. That is, hospitals that are categorized as efficient are likely to provide more uncompensated care. We also found that hospitals tended to provide more uncompensated care when increased demand for these services occurred in a market. Increases in Medicare or Medicaid patient share reduced the provision of uncompensated care. In relation to hospital efficiency, the results indicated that HMO penetration and Medicaid patient share reduced hospital efficiency.

Practice Implications: This study found that efficient hospitals tend to provide more uncompensated care over time. The findings also suggest that hospitals alter their efficiency and provision of uncompensated care in response to a number of environmental pressures, but it may depend on the type of pressures or uncertainties encountered.